Chronicles Of Depression 2.0: #343: Zero

There, we said it. Now you know the worst-case scenario. And here’s the good news: The odds that that will happen are likely similar to the odds that a comet will hit the earth (in which case we’ll have other things to worry about).

But what will go to zero?

* A lot of leveraged portfolios.
* A lot of equity in houses.
* A lot of consumer net worth.

Put differently, when the value of the asset drops below the value of the debt used to buy it, poof. So it’s not just Wall Street that is rapidly developing a distaste for leverage.

There’s a good illustration and explanation here of How To Go To Zero.

And this:

(By the way, this is what just killed all those Wall Street banks. Unlike consumers, they didn’t have 45% debt-to-value ratios or even 80% debt-to-value ratios. They had 97%-debt-to-equity ratios. So it didn’t take much of a decline in equity to blow them to smithereens.)